AMENDMENT NO. 3
                            TO AGREEMENT AND PLAN OF
                            REORGANIZATION AND MERGER
                     BY AND AMONG U.S. ENERGY SYSTEMS, INC.,
                            USE ACQUISITION CORP. AND
                      ZAHREN ALTERNATIVE POWER CORPORATION


     This  Amendment  No. 3 to Agreement and Plan of  Reorganization  and Merger
(the "Amendment") is made as of the 19th day of January,  2001 by and among U.S.
Energy Systems,  Inc.  ("Parent"),  USE Acquisition  Corp.  ("Merger Sub"),  and
Zahren   Alternative  Power   Corporation  (the  "Company").   Unless  indicated
otherwise, capitalized terms shall have the same meanings herein as they have in
the Merger Agreement (as defined below).

                               W I T N E S S E T H

     WHEREAS,  Parent,  Merger Sub and the Company  previously  entered into (i)
that  certain  Agreement  and  Plan of  Reorganization  and  Merger  dated as of
November 28, 2000,  (ii) that certain  Amendment No. 1 to the Agreement dated as
of the 11th day of December,  2000 and (iii) that certain Amendment No. 2 to the
Agreement dated as of the 19th day of December,  2000  (collectively the "Merger
Agreement"); and

     WHEREAS,  the  Parent,  Merger  Sub and the  Company  now wish to amend the
Agreement.

     NOW,  THEREFORE,  in consideration of $10.00 and other  consideration,  the
receipt and  sufficiency  of which are hereby  acknowledged,  the parties hereto
agree as follows:

     1. Section 2.04 of the Merger  Agreement is hereby  amended by deleting the
existing  paragraph  in its entirety  and  inserting in its place the  following
paragraph:

          SECTION 2.04. Closing.  The closing (the "Closing") shall occur at the
     offices of Robinson Brog Leinwand Greene Genovese & Gluck P.C., 1345 Avenue
     of the Americas,  New York, New York on the first Business Day of the month
     following the month in which the Parent's Stockholder Approval is obtained,
     but no later than  February 1, 2001,  (the "Closing  Date");  provided that
     such Closing Date shall be extended by a number of days equal to the number
     of days,  measured  inclusively,  contained  in the  period  commencing  on
     December 20, 2000 and ending on the date on which Parent  receives  written
     notice from the SEC that the Proxy  Statement  referred to in Section  6.01
     has been  approved  for delivery to the  Parent's  shareholders;  provided,
     further,  that (i) if such extended Closing Date is not a Business Day then
     the  closing   shall  be  further   extended  to  the  next  Business  Day.
     Notwithstanding anything to the contrary herein, the closing date shall not
     be extended beyond May 1, 2001 (the "Termination  Date").  The


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     parties will proceed diligently and use their respective  diligent efforts,
     exercised  in good  faith,  to effect the  Closing on or before the Closing
     Date. The Closing shall constitute the acts which take place on the Closing
     Date  by  which  the  transactions   contemplated  by  this  Agreement  are
     consummated.

     2. The definition of "Ordinary Course Working Capital" contained in Annex 1
to the Merger  Agreement is hereby  amended by deleting  "$700,000"  from clause
(ii) of the third sentence and replacing it with "$800,000."

     3. Except as amended hereby, the Merger Agreement is as hereby ratified and
confirmed  and,  as so  amended,  remains  in full  force and effect on the date
hereof.


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     IN WITNESS  WHEREOF,  Parent,  Merger Sub and the Company  have caused this
Agreement to be executed as of the date first written above.

                                       U.S. ENERGY SYSTEMS, INC.


                                       By: /s/ Goran Mornhed
                                          ---------------------------------
                                           Name: Goran Mornhed
                                           Title: President and
                                           Chief Operating Officer


                                       USE ACQUISITION CORP.


                                       By: /s/ Goran Mornhed
                                          ---------------------------------
                                           Name: Goran Mornhed
                                           Title: President


                                       ZAHREN ALTERNATIVE POWER CORPORATION


                                       By: /s/ Bernard J. Zahren
                                          ---------------------------------
                                           Name: Bernard J. Zahren
                                           Title: President


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